Personal Finance

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Congress, in constructing the new tax law, at first tried to tighten the rules on capital gains taxation, with an eye to crimping speculative prof its. However, such a chorus of objections came from in vestment men, stockholders, people with houses that had increased in value and others that the tax architects de cided to leave the law alone for gains up to $50,000. Above

Last year Congress enacted the Tax Reform Act of 1969, the most massive overhaul of the tax law in the nation's history. The following article is the fourth in a series that periodically will examine the implications for personal money management of the changes that were adopted. that level, taxpayers face higher rates, unless they do some smart planning.

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In fact, anyone with sub stantial capital gains needs to familiarize himself carefully with the changes in the rules.

¶The six‐month holding pe riod continues. A gain on property held less than the prescribed period is short term and taxed as regular in come. A gain on assets held six months or more becomes a long‐term gain, getting more favorable treatment.

¶Up to $50,000 of long term gain keeps the taxpayer in the old ball game. He has the usual two methods to consider. He can elect to have one‐half of his capital gain added to his regular in come and be taxed at such rates, or he can qualify for the alternative top rate of no more than a 25 per cent tax on the gain. Thus, if he chooses the latter, his tax on a $50,000 gain would be no more than $12,500, no matter what his tax bracket.

¶Above the $50,000 level, he runs into some complica tions—and a higher rate. In fact, the tax planners make the burden progressively more burdensome each year through 1972. The change is gradual, but it's definite — a rate of 29½ per cent in 1970, rising to 32½ per cent in 1971 and to 35 per cent in 1972.

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There are some exceptions that might be worth investi gating if contracts signed be fore Oct. 10, 1969, are in volved in producing the gains.

Meanwhile, there are some tax techniques that might help. A taxpayer with expec tation of a gain well over the $50,000 level might plan ahead somehow to receive the money in installments.

This would not be overly difficult in the case of selling a home or land since the buyer probably would be will ing to cooperate.

Also, in the case of royalties or large fees, the recipi ent could make sure the money arrived over two years instead of one.

Spreading such gains is fairly simple if the sales or deals are made late in one year.

What about a potential gain in the sale of some stock? Here the taxpayer has several possibilities. For ex ample, he could sell part of his investment in 1970 and another part of it in 1971, thus spreading the gain be tween the two years.

The taxpayer can also use the more sophisticated tech nique called “selling against the box.” Suppose he has al ready taken the basic $50, 000 in capital gain this year, yet still owns 1,000 shares of stock on which he has a $20 a share, or $20,000 total profit, and he wants to as sure his gain without selling this year.

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This can be done by selling short 1,000 shares of the same stock, and then after Jan. 1, 1971, he can cover his short sale by making delivery of his own shares. Thus he has pushed his gain ahead into next year while fixing the price for the shares at this year's level.

If the price of the shares drops, the taxpayer's profit on the short sale ostensibly offsets the decline in the price of the shares he owns. If the price rises, the poten tial profit he can obtain on his own shares would offset loss on the short‐sale.

Unfortunately, the new tax makes the whole question of capital gains much more dif ficult for the average tax payer to understand, espe cially if his gain is large in one year.

Besides the $50,000 ceiling for the low rate, and the various exceptions to the rules, the taxpayer also has to keep the subject of in come averaging very much in the forefront of his mind, plus a new aimmick—the 10 per cent tax on tax prefer ence income.

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This topic—income averag ing—was covered in article three of this series. It now applies to capital gains for the first time.

The key points to remem ber are that the 1970 income with the capital gain in cluded must be $3,000 more than the average of the pre vious four years income for the taxpayer to be able to use income averaging. Also, the 1970 income must ex ceed by 20 per cent the av erage of the four years.

Under averaging, the tax payer can apportion his ex traordinary profit over the preceding four years, thus increasing tax liability for those years, but lessening the effect for 1970.

The tax on so‐called pref erence income applies in the case of the excluded one‐half of capital gains above a $30, 000 exemption, thus affect ing mainly taxpayers whose gains are very substantial.

All of these factors point up the complicated interplay of the new tax law's ground rules.